A gain contingency is a condition existing at the balance sheet date that may lead to a gain for a business if a future event happens. Examples include a lawsuit the company has filed and expects to win, a pending insurance claim, a possible tax refund under dispute and a claim against a supplier for breach of contract. It is another name for a contingent gain, which covers the topic in more depth.
How the term is used
Gain contingency is the term used in US GAAP, in ASC 450-30. The rule is that a gain contingency is not recognized in the financial statements until it is realized or realizable, which usually means the case has been settled or the payment is assured. Even a very likely gain is not recorded in advance. This is different from a loss contingency, which is accrued when probable and reasonably estimable. The asymmetry reflects accounting's long-standing caution, or conservatism, about recognizing income before it is certain, so that net income is not overstated.
A company may disclose a gain contingency in the notes to the financial statements, but it must take care not to give misleading impressions about the likelihood of realization. Under IFRS, IAS 37 calls the equivalent item a contingent asset; it is disclosed when an inflow is probable and recognized only when it is virtually certain. Once a settlement is agreed, the gain is recorded and reported, often among gains or other income, in the period in which it becomes realized.